By Werner Gerber, CFA® | Founder, ClearGauge Wealth
ClearGauge Wealth (Pty) Ltd is an Authorised Financial Services Provider (FSP No. 55826).
Last fact-checked: 8 August 2026
Quick Answer
In brief Sequence risk is the risk that weak market returns come early in retirement while you take income. The same average return can lead to a different result when income is taken during poor years. It does not predict a loss. It shows why a plan should test weak early years before you act.
Visual Summary
Illustrative explanation only. Actual results depend on returns, withdrawal timing, fees, tax, inflation and the investments held.
| Return order | What happens while income is taken | Question to test |
| Weak returns first | Income may require selling more units after values have fallen. | Which costs could change if the first years are difficult? |
| Stronger returns first | Early growth may leave a larger balance before later withdrawals. | Would the plan still work if the order were reversed? |
| Same average return | The path can still differ because withdrawals change the money left invested. | Is the plan tested on more than one return path? |
Decision Framework
1. Separate Essential Income From Flexible Spending
Start with the money that must keep arriving. This may include housing, food, medical aid, debt payments, care and basic transport. Then list spending that could change for a time. Travel, gifts, upgrades and some leisure costs may be more flexible. The point is not to cut spending. It is to see which part of the income plan has no room to move in a weak market.
Next, map income sources against those costs. Some income may be set for a stated period. Some may depend on investment values. Some may change with inflation or policy terms. A clear map helps show whether essential costs rely heavily on money that must be sold after a market fall.
2. Test a Weak First Few Years
Do not rely on one long-term return guess. Ask what the plan could look like if markets are weak in the first two to five years after retirement. Include planned income, fees, tax, price rises and any income that may need to rise. This is a stress test, not a forecast. It helps show trade-offs before there is pressure to act.
A useful question is simple: if the balance fell, what would actually happen next? The answer may involve a lower flexible spend, a reserve used for a period, another source of income or a review of the drawdown. The answer should come from the plan, not from a prediction that markets will recover by a set date.
3. Review the Withdrawal and Investment Choices Together
Income and the fund work together after retirement. A higher income request leaves less money in the fund. A fund with less growth may have smaller short-term swings, but it may also struggle to keep up with future prices. More growth can bring a different long-term trade-off, with more short-term market moves. These are planning trade-offs, not one right answer.
ASISA says a living-annuity customer carries investment risk and the risk of living longer than expected. It also says income is not guaranteed and depends on life span, the income rate chosen and fund returns. That is why a retirement-income review should look at the whole plan, not a return chart alone.
Key Concepts
What Sequence Risk Means
Sequence risk is about when returns happen. A market fall can hurt more when income is being taken out. The income payment does not just show a lower value. It takes out money that would otherwise stay invested and share in a later rise. The key point is simple: poor early returns and income payments can work against each other.
The risk is less sharp when no income is needed from the fund. Values can still fall. Yet units may not need to be sold to pay for spending. The issue is bigger in retirement because income is leaving the fund while its value can move.
Why an Average Return Is Not Enough
An average can hide the path. Think of two funds that start with the same amount, pay the same income, and have two years of returns. One falls first, then rises. The other rises first, then falls. With no income taken out, both end at the same value because they use the same two returns. Once income is taken out, their end values can differ.
This does not tell us which return path will occur. It shows why a plan needs more than one path. It should say when income is taken and whether spending will change. Without those facts, a model can seem exact while leaving out what matters.
Time can make an early gap bigger. Income taken from a lower balance leaves less money in the fund for later gains. If income rises as prices rise, the amount taken may grow while the balance is under strain. This does not mean income must stay fixed. It means the plan should show and test any future rises.
A good test uses several paths, not one return number. It can show a weak start, a strong start and a longer spell of low returns. It cannot find the future. It can show which must-pay costs may come under strain and what changes could help. It also helps you see which bills matter most before a bad year arrives.
Worked Example
Two Return Paths With the Same Income
Suppose a fund starts at R1 million. R60,000 is taken at the start of each year. In one path it falls 10% in year one and rises 10% in year two. In the other, the same returns come in the other order. This example leaves out tax, fees, inflation and changes in spending.
Calculation: R60,000 is taken at the start of each year. These are made-up numbers, not a return forecast or a suggested income amount.
| Path | Year 1 return | Year 2 return | Value after two years |
| Weak return first | -10% | +10% | R864,600 |
| Strong return first | +10% | -10% | R876,600 |
Both paths use the same two yearly returns. The path with a strong first year ends R12,000 higher. The second income payment comes from a larger balance. In real life, the gap may be bigger or smaller. It will depend on how long markets are weak, the income taken, price rises, costs and the fund mix.
Reality Check
No plan can remove all market risk. But it can make the response clear. Gather current values, the exact income amount, a current budget, fee details and the terms for each income source. Then ask what would happen if markets fell soon after retirement.
- Which costs must continue even if markets are weak?
- Which costs could reduce for a period without causing harm?
- When is each income amount reviewed or changed?
- What fees, tax and price rises reduce the cash available to spend?
Review the plan after a major change in health, spending, family needs, other income or portfolio value. A review is not a prediction. It is a way to check whether the facts have changed enough to alter the trade-offs.
Common Mistakes
Assuming a Recent Return Pattern Will Continue
Recent gains do not make future weak years impossible. Recent losses do not prove that a recovery is close. A retirement-income plan should be able to discuss both paths without treating either as certain.
Treating Cash as a Complete Answer
A short-term reserve may help with near-term spending, but it has its own trade-offs. Cash returns may not keep pace with rising prices. The size, purpose and replenishment of any reserve depend on the wider plan. Holding cash is not a universal solution.
Changing Everything After a Market Fall
A sharp fall can create pressure to make large changes. Selling or switching without checking the income need, costs, terms and time frame can create new risks. A written response plan can reduce the need for rushed decisions.
Ignoring the Difference Between a Product Limit and a Plan
A permitted drawdown range or product feature does not prove that an income amount suits a household. The relevant question is whether the amount works with costs, other income, tax, investment risk and the time the money may need to last.
What This Framework Does Not Decide
This guide cannot tell you which fund, product, income amount or cash reserve suits you. It cannot work out your own retirement result. Health, family needs, other income, tax, fees, life span and product terms can change the answer. Use these questions to plan a discussion about your aims, financial situation and needs.
Frequently Asked Questions
Does sequence risk matter if I do not withdraw from my investments?
It usually matters less if you do not need to take income. Value can still fall. The main retirement-income effect happens when weak values and income payments occur together.
Can cash remove sequence risk?
No. Cash may help pay the next bills. Yet it can lose buying power as prices rise and it may grow more slowly than other assets. Its role needs to be tested against the wider plan.
Is a guaranteed annuity a solution to sequence risk?
A guaranteed annuity may pay a set income for stated terms, with the insurer carrying some risks. It can be part of a plan, but it is not right for every person or every goal.
How often should a retirement-income plan be reviewed?
Review it when income choices or product terms require it, and after a big change in spending, health, family needs, other income or fund value. The right timing depends on the arrangement and your situation.
Financial Clarity Review
A practical next step
If this topic affects a major retirement decision, bring your budget, current income statements, other-income details, fees and product terms to a Financial Clarity Review. The review can show the trade-offs in a weak-market period. It does not promise an outcome or replace personal advice where advice is needed.
Continue Exploring
- How Much Do You Need to Retire Comfortably in South Africa?
- What Is a Safe Withdrawal Rate for South African Retirees?
- How Does Inflation Erode Retirement Savings Over Time?
- How Does Regulation 28 Affect Retirement Savings?
- Should You Combine a Living Annuity and a Guaranteed Annuity?
- What Is the Difference Between a Living Annuity and a Guaranteed Annuity?
Sources and Further Reading
Primary sources were checked on 2 August 2026 where this article uses time-sensitive retirement or regulatory facts. Recheck product terms, legal limits and personal tax treatment before acting.
- ASISA: Standard on Living Annuities (last updated 30 October 2024)
- ASISA: Living annuity drawdown rate average drops below 6% (20 August 2025)
- Financial Sector Conduct Authority: FSP search
Important Disclosure
General information only
This article is general education. It is not financial, investment, tax or legal advice. The example uses inputs that may not match your situation. It is not a forecast, promise or recommendation. Investment values can fall or rise. Living-annuity income is not guaranteed and may change. Consider advice suited to your objectives, financial situation and needs before making a major decision.